Tech

Internet stocks still well below their bubble-era highs

Valuations more reasonable as stocks trade on fundamentals over speculation

By

DanGallagher

This update corrects a typographical error.

SAN FRANCISCO (MarketWatch) -- A certain class of investors might be forgiven for still feeling burned by the dot-com bubble, even after a decade has passed.

Specifically, those who put money in at the high, when breathless press accounts of skyrocketing IPOs and startups rich with venture capital and -- at times -- public-market cash caused all reason to be thrown out the window. After all, the Nasdaq Composite Index
COMP, -1.94%
had topped the 5,000 mark -- an all-time high that was more than double the index's value just a year before. Many thought there was even more room to run.

But the reckoning was swift and harsh. Within 18 months, the Nasdaq had plunged by 78%, its lowest level in six years. Even now, after a strong run-up over the past year, the index remains at less than half its high mark achieved on March 10, 2000.

"Obviously, the market got ahead of itself," said Ryan Jacob, chairman and chief investment officer for Jacob Asset Management, which manages the Jacob Internet Fund, which came into existence just a few months before the peak.

Jacob's fund
JAMFX, -1.91%
remains down 82% since the Nasdaq peak. That mirrors the performance of other similar measures. The Dow Jones Internet Composite Index is down 79% since that time, while the Morgan Stanley
MOX, -4.76%
is down 81%.

Jacob notes that the froth in the market was not entirely groundless. He called the Internet a "groundbreaking development in our society" which presented "once-in-a-generation" business opportunities for the right ideas.

"That was the tricky thing about it. The opportunities were so large. A lot of good companies were getting funded; so were a lot with questionable business plans. When the economy and the market started to turn, these companies were extremely vulnerable."

So vulnerable, in fact, that some have disappeared altogether, while most others have seen their stature greatly diminished.

For instance, out of the 10 largest Internet companies ranked by FactSet Research in terms of market value as of March 10, 2000, two are gone completely. Terra Networks and Inktomi were snapped up in acquisitions following the dot-com meltdown for a fraction of their previous value.

Among those that remain, their market values have plunged by an average of 88%.

Who survived, who thrived

Notably, three of the biggest Internet stocks of the time are still around -- and one has managed quite well.

Amazon.com Inc.
AMZN, -1.80%
has seen its market value more than double from its level a decade ago -- up nearly 140%. Much of those gains have come just in the past year, as the online retailer has seen its stock go on a tear thanks to strong earnings growth and increased share of the e-commerce market.

Yahoo Inc.
YHOO
which was the largest Internet stock in March of 2000 based on market cap, has fared less well. The Web portal remains about 77% below its market value a decade ago, on a split-adjusted basis.

EBay Inc.
EBAY, -1.44%
has fared better, though its shares have been on a roller coaster in the past decade. Adjusted for splits, the stock hit an all-time peak near the $60 mark in late 2004. The shares now trade around $23.50 -- down only slightly from their level a decade ago when adjusted for splits.

Still, most of the big Web names a decade ago have faded into oblivion. Of the 40 companies included on the Dow Jones Internet Composite on March 10 of 2000, only 10 remain on the roster. Names such as Exodus Communications, Excite@Home, Lycos, MP3.com and eToys now litter the dot-com graveyard.

Those who took their place -- along with the few survivors -- are trading at much lower valuations. The average float-adjusted market cap measured by the Dow Jones Internet Composite now is down by 94% compared with 10 years ago.

"It was very challenging. There were a lot of qualitative factors that went into making an investment," Jacob said, remembering a large position he took in GeoCities, a family of community Web sites that was acquired by Yahoo in early 1999 for nearly $3.6 billion in stock. "On financials alone, that business did not look very attractive. But they were top-10 in terms of traffic. We tried to look at what was their opportunity to create a strong business."

Better deals now

Jacob argues that when the market corrected from the dot-com bubble, "the pendulum swung too far the other way."

He points to strong companies now, like Amazon and Google Inc.
GOOG, -1.72%
that have solid business fundamentals along with strong balance sheets. And he notes that the IPO market has become far more selective, with well-know Web brands such as Facebook and Twitter that have still not gone public as they work to build up their businesses.

"There are so many companies now at reasonable values, which is why we see a lot of value managers with tech in their portfolios now," he said.

Another effect of the dot-com crash has been to inspire tech companies to hold on tightly to their cash. He pointed to Apple Inc.'s
AAPL, -1.92%
nearly $40 billion cash hoard as well as large bank accounts at companies like Google.

"Personally, I don't think it's very efficient, capital-wise. But for investors, it gives them a certain degree of comfort," he said. "When you can buy high-quality names at market multiples, you're not getting a bad deal."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.